Elbit Systems Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Second Quarter 2024 Results Conference Call. All participants are at present in listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded.

Operator

I would now like to hand over the call to David Raviya, Elbit Systems' Investor Relations Director. David, please go ahead.

Speaker 1

Thank you, operator. Good day, everyone, and welcome to our Q2 2024 Earnings Call. On the call with me today are Uzi Mahlis, our President and CEO and Kobi Kagan, our CFO. Before we begin, I would like to point out that the Safe Harbor statement in the company's press release issued earlier today also refers to the contents of this conference call. As we do every quarter, we will provide you with both our regular GAAP financial data and certain supplemental non GAAP information.

Speaker 1

We believe that this non GAAP information provides additional details to help understand the performance of our business. You can find all the detailed GAAP financial data as well as the non GAAP information and their reconciliation in today's press release. Kobi will begin by providing a discussion of the financial results, followed by Pussi, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a Q and A session. With that, I would like now to turn the call over to Kobi.

Speaker 1

Kobi?

Speaker 2

Thank you,

Speaker 3

David. Hello, everyone, and thank you for joining us today. The Q2 of 2024 yielded positive results, driven by 12% year over year increase in revenues, additional growth of our backlog that now exceeds $21,000,000,000 and improved profitability. I will now highlight and discuss key figures and trends in our financial results. 2nd quarter revenues reached $1,626,000,000 compared to $1,454,000,000 in the Q2 of 2023.

Speaker 3

This reflects 12% growth and is the 2nd quarter in a row in which we have experienced low double digits revenue growth. In the Q2 of 2024, Europe contributed 29% of revenues North America, 23% of revenues Asia Pacific, 15% of revenues and Israel contributed 27% of revenues. It should be noted that our diverse geographic revenue distribution is a very important factor for the long term sustainability of our business.

Speaker 4

Israeli revenues grew from $245,000,000

Speaker 3

in the $4 $44,000,000 in the Q2 of 2024. This growth reflects the increased demand for a broad range of fast solutions following the breakout of the sorts of iron ore. In addition, we see growth in North America revenues due to the increasing demand for maritime and more fire assistance. The non GAAP gross margin in the 2nd quarter was 24.4% compared to 26.1 percent in the Q2 of 2023. GAAP gross margin in the 2nd quarter was 24% of revenues compared to 25.6 percent in the Q2 of 2023.

Speaker 3

The 2nd quarter non GAAP income was $130,500,000 or 8% of revenues compared with $116,500,000 or 7.9% of revenues in the Q2 of last year. GAAP operating income for the the 2 percent of revenues compared to $101,600,000 or 7% of revenues in the Q2 of 2023. This growth in operating income and expansion in operating margin are the result of increased operating expenses efficiency. The operating $116,800,000 or 7.2 percent of revenues compared to $93,400,000 or 6 0.4% of revenues in the Q2 of 2023. This increase was due to additional R and D efforts in our Land segment and continuous investment in high power laser solutions.

Speaker 3

Marketing and selling expenses were $87,700,000 or 5.4 percent of revenues versus 101.7 $1,700,000 or 7% in the Q2 of 2023. G and A expenses were $68,700,000 or 4.2 percent of revenues compared to 75 point $4,000,000 or 5.2 percent of revenues in the Q2 of 2023. Financial expenses were $29,100,000 in the Q2 of 2024 compared $32,100,000 in the Q2 of 2023. The financial expense amount reflects enduring patent monetary policy implemented by Central Bank Intermarkets in which Elbit operates, including the Bank of Israel and United States Federal Reserve in response to rising inflation by retaining interest rates at high level. Additionally, our rapidly growing backlog due to the source of iron ore required higher levels of working capital and capital expenditures.

Speaker 3

We recorded a tax expense of $11,300,000 in the Q2 of 20 24 compared to $9,200,000 in the Q2 of 2023. The effective tax rate in the Q2 of 2024 was 13.2% compared to 13.6% in the Q2 of 2023. Our non GAAP diluted EPS was $2.08 for the Q2 of 20 24 compared to $1.65 in the Q2 of 2023. GAAP diluted EPS was $1.76 for the Q2 of 2024 compared to $1.40 in the second $4 diluted EPS in the Q2 of 2024 compared to the Q2 of 2023. We remain focused on profitability with the aim of achieving additional growth in the next quarter of 2024.

Speaker 3

I will now review the Q2 of 2024 year over year performance of our business segments. Note that our segmented disclosure is provided on GAAP basis. Aerospace revenues were almost similar year over year with small 1% decrease. T4 and Cyber revenues increased by 11% year over year, mainly due to radio system sales. IStar and EW revenues increased by 9% year over year, mainly due to electronic warfare and electro optic system sales in Israel and Asia Pacific.

Speaker 3

Land revenues increased by 37% year over year, mainly due to increased in munition and munition sales in Israel. LV Systems of America revenues increased by 11% year over year. Our order backlog as of June 30, 2024 reached $21,100,000,000 5 $1,000,000,000 higher than our backlog at the end of the Q2 of 2023. Approximately $2,500,000,000 of this increase came from Israel. In the Q2 of 2024, the company recorded new orders of $2,400,000,000 of which $1,100,000,000 came out from the Israeli market.

Speaker 3

Approximately 69% of the current backlog is attributable to orders from outside of Israel. Approximately 43% of the current backlog is scheduled to be performed during 2020 4, 2025, while the rest is scheduled to be performed during 2026 and after, which demonstrates the potential growth of the company. Operating cash flow for the 6 months ending 30th June 2024 was $26,000,000 inflow compared to $210,700,000 outflow for the 2nd period last year for the same period last year. We continue to increase inventories to support the increasing backlog. The Board of Directors has declared a dividend of €0.50 per share.

Speaker 3

I will now turn the call over to Mr. Manclis, our CEO. Woodsy, please go ahead.

Speaker 2

Thank you, Kobi. I would underweighting dedication and commitment to our customers in Israel and abroad. Our workforce deserves special recognition for their extraordinary efforts over the past several months in meeting the urgent need of the Israeli MOD during the recent conflict and supporting our international customers. I, along with the entire company, wish for the immediate return of all hostages held captive in Gaza. They are in our hearts and mind, and we are waiting for the return home.

Speaker 2

In line with the previous quarter, we are pleased to report continued growth in our order backlog, which now exceeded US21 $1,000,000,000 Revenue increased by approximately 12 percent and profitability improved. 2 key factors have been instrumental to our success. Elbit Systems extensive geographical footprint across Europe, North America, Asia Israel and our portfolio of advanced technological solutions proven effective in the context of rising global defense budget. Elbit Systems remain committed to expanding its global presence by fulfilling our customer commitment. Our company continues to implement its US7 $1,000,000,000 revenues, which I believe will be achieved ahead of schedule and our internal target of around 10% operating margin.

Speaker 2

Despite the significant increase in revenues from the Israeli market, the majority of our revenues are generated outside of Israel and our primary focus remains international markets. While supply chain challenges still exist, our diversified supplier base has mitigated their impact. International revenues accounted for 73% of total revenue in the 2nd quarter. We were pleased to announce several recent international contract awards that enhance our global presence. Last week, for example, we announced a $270,000,000 contract to supply Rocket artillery to an international customer over a 4 year period.

Speaker 2

On April 25, 2024, Elbit America celebrated the delivery of the 3000 F35 Helmet Mountain display system from the company site in Merrimack, New Hampshire. The F-thirty 5 Generation 3 Helmet Mounted Display System is an advanced helmet mounted displacer. In addition to several contract wins in Israel and the Netherlands, for example, we secured an initial $37,000,000 contract in May 2024 to supply iron fist active protection system to generate dynamic orderness and tactical system for upgrade the U. S. Army Bradley vehicles.

Speaker 2

This 24 month contract offers significant growth potential. Furthermore, we recently announced a $130,000,000 contract with BAE Systems Hagron for argon based active protection system integration into the CV90 Infantry Fighting Vehicle as part of a project for European country, marking another strategic partnership. The Iron Fist System provides 360 degree protection against a wide range of anti armor threats, including rocket propellant, grenades and Kinetics energy tanks round in both open terrain and urban environment. This advanced technology is a result of substantial R and D investments. The system growing demand underscores Elbit System leadership position and the market appetite for our innovative solution.

Speaker 2

Through the recent conflict, we significantly increased production to meet the IDS urgent needs while maintaining deliveries to international customers. Our focus is on expanding production capacity to drive revenue growth beyond the increase in production. A prime example of our capacity expansion is a recent award of $300,000,000 contract with the Israeli Ministry of Defense for ammunition supply. This 10 year contract will cease the construction of a new manufacturing facility scheduled for completion within 2 years. Combining the new plant facility and the Ramat Becca facility, which is scheduled for completion by the end of this year, our production capabilities will be enhanced and support increased demand for both the Israeli Ministry of Defense and International Markets.

Speaker 2

In support of the surge in demand, we are also adding shifts and recruiting 100 of new employees. July 29, Elbit Systems was awarded a contract worth approximately $190,000,000 from the Israeli Ministry of Defense for the supply of iron zinc guided motor munitions. This 2 year contract, which has also international potential will see the delivery of precision guided motor munitions launched from 120 millimeter motor designed to accurately target and destroy objective utilizing both immune GPS and laser guided technology. In July 2024, we participated in the Farnborough Air Show in the UK, which was very successful. During the show, we demonstrated a wide range of solutions to our international customers and met with many strategic business partners.

Speaker 2

And with that, I will be happy to take your questions. Operator?

Operator

Thank you. The first question is from Pete Skibitski of Alembic Global. Please go ahead.

Speaker 4

Yes. Hello. Good afternoon. Nice quarter. Thank you.

Speaker 4

First of all, a comment just the backlog growth has been very impressive. It looks like backlog has grown about 40% since the end of 2022, which is just incredible, frankly. I would like to make sure I understand the gross margin dynamics a little bit better. It's obviously, we've seen your geographic mix of revenue shift to Israel. And it looks like that's over the last 3 or 4 quarters, that's brought some gross margin compression.

Speaker 4

And I'm just wondering how we should think about the margin dynamics going forward in light of, but it sounds like you reiterated that 10% operating margin target, which I think is set for 2026. I'm just wondering in light of the gross margin compression, how you guys attain that 10% target?

Speaker 3

Thank you, Pete. It's Kobi. Actually, we see a $5,000,000,000 increase in backlog just over the last year. So that is an incredible increase in our backlog. And of course, with this increase, we also watch the backlog for stability, watch it very carefully.

Speaker 3

So as we mentioned, we see a lower GP level, but you see a higher OP level. So with the sales in Israel, we see much lower M and S expenses and the total result, the OP level is in the same level of the company profitability. So we don't see any issue and we actually now can we believe that we are in a very good position to have the 10% OP profitability non GAAP in 2026. As well, you can see a different OP profitability between the segments and also GP profitability between the segments. We disclosed in the last NAST Annual Report the segment's profitability.

Speaker 3

And you see there the OP profitability, which is quite different between the segments. And you see there a decline in the profitability in the U. S, U. The continuous OP profitability expansion. So the management is closely monitoring this issue of profitability.

Speaker 3

And we are certain that even though the mix this quarter was less favorable in GP terms, we can see the continuous growth in meeting the 10% target that internal target that we believe in.

Speaker 4

Okay. That's very helpful. Yes. And I didn't note, it looks like SG and A altogether for this quarter was less than 10% for the first time, I don't know, at least in quite a while. And so that's a trend that we should expect will continue so that you can get to your OP target, it sounds like.

Speaker 3

So thank you. You noticed the increased operating expense efficiency that we see very strong in this quarter, a very strong operational efficiency, which compensated even more than compensated for the decline in the Jifter profitability.

Speaker 4

Okay. That makes sense. Just last one for me. I noticed cash flow did improve this quarter and really for the first half of twenty twenty four, it's much better versus the first half of twenty twenty three. Do you think now do you expect you can be free cash flow positive for 2024 in light of the previous start to the year?

Speaker 3

So we are very positive on this. I cannot give you a certain answer as of the profitability, which we can monitor much closer. It, of course, depends on the continuous payments from the Ministry of Defense in Israel, which paid accurately during the Q2. So we had a very positive factor of payments from the Ministry of Defense in Israel. We cannot guarantee that it's going to continue to the rest of the year.

Speaker 3

And there are many other different variables and moving parts, especially the fact that we need to be ready with inventories to support the growth of the company, expected growth and again some issues with supply with our supply chain that are still for additional inventories that we need to keep. So that is, of course, keeping the cash this is, of course, stressing the cash. But to give you a bottom line, we sure expect a positive free cash flow for the annual for this 2020 4 year? We are happy, good

Speaker 2

to hear from you. We are working very hard on the cash flow. We understand the importance

Speaker 4

of cash flow, specifically when

Speaker 2

you because of the current entire company.

Speaker 4

Okay. That's great. Very helpful guys. Thank you.

Speaker 3

Thank you, Pete. Looking forward to see you.

Operator

The next question is from Craig Conrad of Jefferies. Please go ahead.

Speaker 5

Good afternoon and great quarter.

Speaker 2

Hi, good afternoon.

Speaker 5

Maybe just sticking to margins for a minute, I mean, you called out the higher R and D in the quarter and the 10% margin target. Any thoughts around how mix evolves over the next couple of years given some of the development work you talked about and what that means for maybe production mix over the next couple of years to kind of get to that 10% target?

Speaker 3

So thank you, Craig, for the question. We can see a shift in the company in terms of moving from a project company to more leaning towards product company. So the ratio between projects and product is different now with increased level of products. Products, I mean, for instance, the Sonu Boys in for our business, the maritime business or the night vision business that we have in the U. S.

Speaker 3

Or the ammunition that we're supplying here from Israel. The fact that we see more product mix and a ratio of product mix is higher than we have in the past. It's very supportive in terms of our profitability. The certainty in products is much higher than the certainty in projects. You don't see the same phenomenon that you see in projects.

Speaker 3

We are still a project company, but the fact that the ratio of products is increasing is very supportive in our profitability targets.

Speaker 5

And then maybe just transitioning to land, I mean, obviously growth was very impressive in the quarter and has been very impressive the past couple quarters. I mean, how do you think about the runway there? Are there any near term capacity constraints just given you called out some of the elements of CapEx and any way to think about the impact of the capacity coming online relative to the overall WAN business?

Speaker 3

So as we mentioned, WAN segment was very strong this quarter. We saw a 37% growth from the same year over year from the same quarter in 2023. We are going We are going to inaugurate the new facility in the south of Israel, Ramat Becca as we call it here, in the end of this year, which actually gives us additional capacity increasing dramatically. Our capacity increasing efficiency as well with many technologies, robots, carbots and additional production stream, which is more modern than our old facilities here in the Central Israel. So that is going to give us a lot of capacity for mostly for the land business, but not just for the land.

Speaker 3

We have investments that we were doing here in Israel and around the world. For instance, we are going to we inaugurated a new facility for UAVs here in Israel, in a location in Israel. We are growing our capacity in the factories in the U. S. For instance, our Charleston facility in the U.

Speaker 3

S. Is actually was inaugurated last year and it's a very big investment and facility. We have also a new facility in Germany and also a new facility in the U. K. So we keep investing and tightening this all is more than 150 $1,000,000 investment that we concluded with the new ERP system that was actually double digit growth that we couldn't support this double digit growth that we see now in the company.

Speaker 5

And then just last one for me and maybe this is somewhat tied to the last question. You mentioned Charleston, but the Americas really seem to turn in the quarter. It has been somewhat weaker the past couple with a nice uptick in Q2. What's driving the U. S.

Speaker 5

Facing business just given kind of moved more in line with what we're seeing out of peers domestically. Any particular drivers of that normalization to call out?

Speaker 2

Hi, good afternoon. It's Buti. We see a different picture actually. We see a growth of 10% in the U. S.

Speaker 2

Market. Last quarter, our revenues in the U. S. Were approximately $317,000,000 in comparison to the previous quarter last year, which was about $337,000,000 So it's a 10% growth in the U. S.

Speaker 2

Market and we have very strong positions in the U. S. Market in several domains. We continue to win business and we are confident that our position in the U. S.

Speaker 2

Will continue to grow.

Speaker 5

Thank you. I'll leave it at that.

Speaker 2

Thank you.

Operator

The next question is from Amit Afrani of Oppenheimer. Please go

Speaker 6

ahead. Hi, guys, and congrats on the great quarter. Can you hear me? I was wondering I have a few questions. My first one is about loitering munitions.

Speaker 6

I was wondering if Elbit is thinking about entering the loitering munitions segment in a much more aggressive way. We see a lot of demand like companies from AVEV, like environment the Switchblade 30600. I was wondering if albeit before with experience in the segment have any plans in that area?

Speaker 2

Yes, of course, we believe that virtual ammunition is an important market for us. We have great competition already in this market. We are one of the first companies to introduce electroimmunitions solution to the market and we have many customers who are acquiring the Sky Stryker system, system, which is a family of retroimmunitions solutions. And these systems are already operational in several customers. But you're fully right.

Speaker 2

We need to we are planning to continue to invest in this domain. There are many additional opportunities in this domain. One of them is men and men teaming, actually combining several UAVs with 1 operator supporting AI the way the fighting procedures. And that's a segment that we continue to invest in. We are planning the international market, we are we believe that a good opportunity for

Speaker 6

us. Okay, great.

Speaker 2

I also want to mention that we are fully vertical here. We do everything from the new EV, from the bird, the platform itself, all the communications, all the electro optics, all the warhead, everything is a price control, everything is commanding control, everything is done internally in the company. So we are fully controlling our destiny, we are fully controlling the cost. It's all in our head.

Speaker 6

So do you think that

Speaker 2

It's actually it's an expansion of our of other solutions that are providing for difficulties.

Speaker 6

So addressing the time to market is going to be quicker if you want to go to loadering munitions

Speaker 5

in the next

Speaker 6

2 to 3 quarters. Is it possible to have

Speaker 5

a new maybe

Speaker 6

much more capacity and maybe new products in the following 2 to 3 quarters?

Speaker 2

Yes. I just want to mention that we have delivered already power of Sky assistance to many customers. We have several production lines for this and we are ready to support any demand that will come from the market.

Speaker 6

Got it. Thank you. And maybe more question for me. Maybe you can give some color about the UAV integration center factory, how it's called in the road. And I don't know if in the boundaries that you can speak of, how much capacity is going to come from there or maybe how much more efficient is going to be compared to the integration center you have right now?

Speaker 2

We see a growing demand for our UAV solution and the beauty here is not just the UAVs themselves. It's the entire system. And there we provide a variety of payloads, which includes EO payloads, VW payloads, unique other payloads like Skyeye and many more. We also provide the network, the command control, everything once again is coming from us. They are fully able to pursue.

Speaker 2

And we see we all see the importance of UAVs here in the current conference we have in Israel and see a growing demand for the family of UAVs that we are providing the board as well. We recently introduced a new member to the family, the Hermes 650, which was introduced just recently to the market. And because of the growing demand that we see and many orders we got, there is a need for a much more modern facility, and we are consolidating several facilities into 1. Once again, there's a lot of automation and rollback, which the new facility, which actually is operational already, will be able to deliver many more solutions to the growing demand we see in the market.

Speaker 6

Maybe one more question for me in the last one. I was wondering if the situation in the Red Sea has any material effect on the company? If so, if you have some problems with the situation, how Elbit is going to mitigate it? Thanks.

Speaker 5

As I mentioned in

Speaker 2

my preview, we see some supply chain issues, however, they are not significant and we find several way for the company.

Speaker 4

Okay, got

Speaker 6

it. Thank you and congrats on the call again.

Speaker 3

Thank you, Amit.

Operator

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available 2 hours after the conference ends. In the U. S, please call 1-eight eighty eight-seven eighty two-four thousand two hundred and ninety one.

Operator

1. In Israel, please call 3,9,250,000,000 A replay of this call will also be available on the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

Speaker 2

Thank you. I would like to thank all our employees for their our joining us today and for your continued support and interest in our company. Have a good day and goodbye.

Operator

Thank you. The Elbit Systems Ltd. 2nd quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.

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